Stock Investing: Fundamental Analysis Using Free Cash Flow Statement

Why is cash-flow statement important?

Remember: You either make profits or you don’t.

Key Parts of a cash-flow statement

Tip: If an item on the cash flow statement is positive, that means the company generates cash. If an item on the cash flow statement is negative, usually surrounded by parenthesis, that means the company uses cash.

Figure 1: Operating Activities(Source:

Tricky concept: Understanding depreciation can be tricky. Think of it this way. Every year, the value of your car falls. It’s a real expense, because it is technically costing you money. But when your car depreciates in value, you don’t get a bill for it. You don’t have to write a check, and it doesn’t cost you cash immediately. Hence, while measuring cash-flow, depreciation is added back to net income.

Tip: A big rise in accounts receivable in comparison to the increase of a company’s revenue can be a tip-off.

Tip: Watch out if you observe that accounts payable is rising relative to a company’s cost of goods sold (as discussed in my article on income statement). It might mean that the company isn’t paying its bills on time, which may inflate its cash.

Tip: When net cash provided by operating activities is positive, it means the company generated cash from it’s normal course of business. However, if it is negative, that means the company burned cash.

Figure 2: Investing Activities (Source:
Figure 3: Financing Activities (Source:

Quick way to monitor a company’s cash flow

Compare a company’s net income with its cash from operations.

Summing it up

What next?


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